All About Interest Rates

One way to think about Interest Rates is to consider it a "rental fee" of sorts. If I rent you the use of my equipment, say, a lawn mower, I can charge you a daily fee for the rental, and expect you to return my equipment. Borrowing money through a mortgage is a similar concept. I loan you the amount you need for a mortgage, and charge you an interest rate for using that initial amount. In the end, as a lender, I would expect to get my initial loan amount back, plus the interest that has accumulated over the term of the loan.

The higher the interest rate I set (that is, the higher my 'rental' fee for the money) the more interest you will have to pay, and, hence, the more you will have to borrow, and the higher amount you'll have to repay each month.

The Interest Rate is a good indicator on the cost of borrowing, but it isn't the only indicator. You should also consider the following aspects:

Interest vs. Lender & Broker Fees

Interest isn't the only cost of borrowing. There are also lender and broker fees, as well as discount points, that are due at closing.

APR

The Annual Percentage Rate is a better way of determining the total cost of a loan than its basic interest rate. The APR includes the additional fees that a simple interest rate may ignore.

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